The Great Depression of 1922


Its Effect on the U.S. and the World 
The introduction of the discussion will focus on the
origins of the Great Depression and the escalating events
that led to it. This will provide adequate foundations to
bring up questions and attempt to answer them in an
objective fashion as to why and how the Depression affected
different industrialized countries in different ways.
The core of the debate will consist of detailed comparable
analyses of the consequences of the Depression with an
emphasis on the economic aspects.
The conclusion will provide a brief overview of the ways
used by the different governments to get out of that dark
episode of world economic history.
When studying the Great Depression and it's effects, it is
not unusual for historians to choose World War I as a
starting point for their investigation. The reason for that
is the importance of the repercussions the conflict had on
the economies of all the countries that were involved in it.
First of all, the War made it impossible for Europe to
maintain previous levels of production. For example, before
the War, France, the U.K. and Germany accounted for about
60 percent1 of the world's exports of manufactured goods, a
share of the market which they could not sustain during the
conflict. Consequently, Europe took many of its markets to
the U.S. and Japan. The stunted growth of the European
economies meant a lower demand for raw materials, which in
turn lowered the demand for European exports.
In agriculture, things didn't look any better, as it was
the sector which employed the most people. At the end of
World War I, Europe was forced to import food from the
U.S.. Moreover, these transactions were conducted on a
credit basis since Europe could not afford to pay for its
purchase at that time.
Clearly, the U.S. was going from being a traditional debtor
of Europe before World War I to becoming its creditor:
America had financed the war and it was issuing loans for
its reconstruction. However, the attitudes in the U.S. were
evolving in an unusual direction: an increasing number of
American financiers were starting to literally seek ut
potential borrowers which led to competition among U.S.
banks and the spreading of unsound lending.2 The main
object was to "do the most business", even at the expense
of essential caution.
What seemed like a beginning of recovery from the Great
War, was in fact an immense accumulation of debts, which
made the international economic order vulnerable to
depression. Analyzing these events with the insight we have
today, they seem even more unbelievably audacious given the
high instability of the borrowing nation. (i.e., Europe)
The triggering event was the crash of the Wall Street stock
market in October of 1929. The stock market collapsed after
steady declines in production, prices and incomes over
three previous months which forced the speculators to
revise their expectations. Anxiety soon gave place to panic
which led to the crash. However, the depression affected
the different industrialized countries in various ways and
degrees of intensity.
The depression was of especially great magnitude in the
U.S. because there were not any welfare benefits for laid
off workers. In the period between 1929 and 1933, money
income fell by 53 percent (real income fell by 36
percent.)3 As a consequence, demand fell significantly,
which in turn led to lower production and more layoffs-- up
to a high of 25 percent rate of unemployment in 1933.
Despite the severity of the situation, the Federal Reserve
did not pursue a monetary expansion on policy which would
have stimulated the economy through lower interest rates
and increased the stock of money in circulation. This
inaction is often attributed to the fact that market
interest rates in 1930-1931 fell to very low levels, much
lower than in the earlier recessions (of 1924 and 1927),
and therefore, the Federal Reserve Board wrongfully saw no
need to pursue an expansionary monetary policy.4 An
indicator of that inaction is that open market operations
did not provide sufficient money reserves for a banking
system faced with depositors anxious for liquidity
(monetary expansion would have filled that need). If the
Federal Reserve had provided additional funds to the
banking sector after 1930, bank failure would not have been
so numerous and the decrease in the attack of ???? would
have been (at least) slowed down.
Still, it would not be accurate to make the Federal Reserve
responsible for all these problems. Other factors
contributed to the precipitation of what began as a
cyclical recession into what we now know as the Great
Depression. One of those is the Hawley Smoot tariff of 1930
which in essence made America more protectionist than ever,
sending import duties to record highs. Evidently,
retaliation from other countries was quick to come. The new
tariff act accelerated the downfall of American trade
volume, which was probably the last thing the U.S. needed
at that stage. President Hoover had always been in favor of
protective tariffs which he considered a strictly domestic
issue and he supported the Howley Smoot Act. Therefore, he
clearly failed to see the implications of such a move.
Soon, the Depression was spreading to the rest of the
world, especially to Europe. There, the single country that
was most affected was Germany whose very weak economy could
not cope with the slow disappearance of American capital.
Let us mention that Germany was still paying reparations
(for World War I), which made its situation even more
delicate. Germany was forced to borrow from Great Britain
and France which could not compensate for the decline in
U.S. lending.5 The trap in which Germany found itself was
quite disconcerting: she had to pursue deficienary policies
to gain the confidence of investors in order to attract
foreign funds. At the same time, devaluaton posed a major
problem. It increased the burden of the external debt
(through the exchange rate mechanism) which was payable in
foreign currencies.
The United Kingdom represented another major force on the
global economic scene. The British economy was not hit
immediately as violently as Germany's. However, as the
repercussions of the world crisis became increasingly
clear, Great Britain experienced a notable decline in its
exports which was even greater than the decrease in its
imports. Those two factors contributed to generate a
deficit in its balance of payments.
Still, compared to most other industrialized countries, the
U.K. got through the Depression in better economic health.6
In the case of France, things went a significantly
different way. First of all, out of the four biggest
industrialized countries of the time (U.S., Germany, U.K.
and France), France was the last to be hit by the
Depression. Many possible reasons are hypothesized to
explain that fact, but the one that is most often heard is
the undervaluation of the French franc.
The French economy began to feel the effects of the world
crisis in 1932. Around that time the Depression caught up
with the French economy through an important decrease in
its exports (due impart to the shear downsizing trend in
the volume of world trade), combined to an increase in
imports. The problems faced by France were also worsened by
the fact that it still was maintaining the gold standard
long after all of the other industrialized
countries--starting with Great Britain in 1931--had
switched to fleeting exchange rates.
As for Japan, we can safely say that it is the one country
among today's industrialized nations that got through the
Great Depression with the least damage to its economy.7
Now that we have illustrated how the world crisis affected
various nations in different ways, it seems only logical
that they would put together solutions that were adapted to
their individual problems.
In the United States, Hoover had failed to bring a solution
to the Depression, and he was replaced by Roosevelt in
1932. The new president brought with him the New Deal,
which can be qualified as a collection of programs aimed at
stimulating different sectors of the economy (like the
Agricultural Adjustment Act and the National Industrial
Recovery Act). As it turned out, the New Deal was not a
particularly successful economic initiative, but it was
definitely a political success, probably because its goal
was to help the American people (even though the means used
to accomplish that were never very clear). What proved more
effective at bringing economic solutions to what was really
an economic problem was the "Keynesian theory". In 1938,
Roosevelt, facing the semi-failure of his New Deal, finally
gave in to an increasing number of his close advisors who
were confident that Keynes' ideas would be more
successful.8 The underlying theory to Keynes' ideas was
that recovery could only come through fiscal expansion--in
other words, running a bigger budgetary deficit. The
additional expenditures were pumped into the economy
through a variety of government actions--like major public
works--in order to stimulate demand by providing people
with income.
In Germany, the Nazis' victory at the 1933 elections was a
major accelerating factor on the road to recovery. The Nazi
program aimed first and foremost at the reduction of
unemployment and it did accomplish at least that. However,
the realization of the plans was conditioned by an
omnipotent government which was best described by Peter
Hayes' analogy (1987): "It is perhaps accurate to say that,
to German industry, the emergent economic system was stiff
capitalism, but only in the same sense that for a
professional gambler poker remains poker, even when the
house shuffles, deals, determines the suite and the wild
cards, and can change them at will, even when there is a
ceiling on winnings, which may be spent only as the census
permits and for the most part only on the promises."9
One other essential vector that Nazis used toward recovery
was rearmament, starting in 1936. Hitler used the defense
industry to satisfy two of his im???: recreate a strong
Germany while giving people work.
The case of Great Britain is different. We have mentioned
earlier how well (relatively to other nations) the U.K. got
through the Depression years. Let us now attempt to explain
why. Three elements are often mentioned in the British
recovery: the abandoning of the gold standard in 1931, the
adoption of higher tariffs and the devaluation of the
pound. When the U.K. abandoned the gold standard, it gave
itself a competitive advantage via-a-vis those countries
which did not. The new tariff laws helped by protecting
domestic industries and the 30 percent devaluation of the
pound added to the competitive edge of the U.K by making
British products cheaper to the rest of the world.
In the face of Depression, France reacted quite differently
from the other industrialized countries. Confident in its
strong economy until 1932, France did not abandon the gold
standard until June 1937 and did not devalue the franc
until October 1936. Those two factors made France rather
uncompetitive for most of the 1930's, given the actions
taken by the U.S., the U.K., and Germany. Those measures,
in time, helped lift France out of the Depression but the
recovery there might have occurred a few years earlier if
the French had only signed their policies to that of the
United States and Great Britain in particular.10
When it comes to Japan, two reasons are proposed to explain
its good economic performance through the Depression: the
fact that it had a planned economy, and the early
understanding of the advantages of devaluating the yen.
Japan improved its competitive position that way and it
reacted very soon after the Depression hit. As a result,
the effects of the crisis were greatly reduced from the

1"The origins and nature of the Great Slump," Fearn.
2"The origins and nature of the Great Slump," Fearn.
3"Capitalism in Crisis,"edited by Garside.
4"La Crise economique dans le monde el en France," Nogaro.
5"The origins and nature of the Great Slump," Fearn.
6"The Great Depression, 1929-1938," Saint Etienna.
7"The Origins and Nature of the Great Slump," Fearn.
8"Capitalism in Crisis,"edited by Garside.
9"Capitalism in Crisis,"edited by Garside.
10"Capitalism in Crisis,"edited by Garside.


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